Eight years after a devastating recession opened an era of loose US monetary policy, the Federal Reserve yesterday began a two-day meeting at which it is expected to turn in the other direction and raise rates in an increasingly normal economy.

The decision will be released today, with markets prepared for an initial 25 basis point “liftoff” that would move the Fed’s target rate from zero to a range of between 0.25 and 0.50 percentage points. It is to be followed by a news conference by Fed chairwoman Janet Yellen to elaborate on the central bank’s latest policy statement.

At midday yesterday markets set a sanguine stage for the Fed’s potentially historic turn. US stock indices were up more than 1 per cent, bond yields had moved higher and analysts said that after weeks of preparation a surprise decision not to rise would be the more disruptive choice.

“Given the strength of the signals that have been sent it would be credibility destroying not to carry through,” said former treasury secretary Larry Summers, a sceptic of the need to raise rates right now.

Generate growth

The rate rise will separate the Fed from major central banks in Tokyo, Frankfurt, Beijing and elsewhere that are all battling to stimulate their economies and generate growth.

The initial rise expected today will still leave US policy extremely loose and Fed officials have signalled they will act cautiously to nurture a tepid recovery.But even that token first step remains fraught.

In the days to come the Fed will have to prove that a new set of tools for managing interest rates will work as expected ; see how higher US rates affect domestic and global financial conditions; and hope weak world demand and commodity prices don’t lead to an overall bout of deflation and force the Fed to reverse course.

To be considered a success, the Fed needs its rate rise to be followed next year by continued US growth, continued low unemployment, and, perhaps most in doubt, a turn higher in inflation. For all the talk of abnormal times and changes in underlying economic fundamentals, the Fed is pinning its hopes on a very conventional premise – that the US consumer will keep spending at recent strong rates, encouraged by low unemployment and the apparent beginnings of a rise in wages.

‘American consumer’

“The American consumer is in full gear and there is nothing but tailwind . . . They are right to be confident,” said Mark Zandi, chief economist with Moody’s Analytics.

Still, opinion is not unanimous. Some Fed policymakers have said they worry the world economy is too weak for the Fed to successfully march off on its own. – (Reuters)